In the stunning case of controversial timber company Sino-Forest, Friday was perhaps the most stunning day of all.

In the stunning case of controversial timber company Sino-Forest, Friday was perhaps the most stunning day of all.

The Ontario Securities Commission cracked down on the company, halting trading in its shares and demanding the resignation of several top executives. Just hours later the OSC rescinded the resignation order because it apparently overstepped the regulator’s legal bounds.

“Sino-Forest and certain of its officers and directors . . . appear to be engaging or participating in acts, practices or a course of conduct . . . which it and/or they know or reasonably ought to know perpetuate a fraud,” the OSC’s bombshell notice read.

Messages seeking comment from Sino-Forest weren’t returned.

The OSC’s actions provided a measure of vindication for American short-selling firm Muddy Waters, which had been heavily criticized after issuing a research report earlier this summer accusing the company of being “a multi-billion dollar Ponzi scheme.”

One critic had called the Muddy Waters report bluntly “a pile of crap.”

In its order, released before stock markets opened, the OSC echoed several of Muddy Waters’ allegations, including overstating the value of its timber holdings in China. The OSC also accused Sino-Forest of dealing improperly with related companies.

“Sino-Forest, through its subsidiaries, appears to have engaged in significant non-arm’s length transactions which may have been contrary to Ontario securities laws and the public interest,” the notice from the provincial securities regulator read.

In its June report, Muddy Waters alleged that Sino-Forest had overstated the value of its holdings in China by hundreds of millions of dollars, and had used a complex web of subsidiaries to inflate its revenue.

“Sino-Forest and certain of its officers and directors appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings,” the OSC said in its notice.

Just three hours after issuing the order, the OSC rescinded a section which had demanded the resignation of Sino-Forest executives Allen Chan, Albert Ip, Alfred Hung, George Ho and Simon Yeung. That section had also barred the five from trading securities.

One business law expert said the OSC overstepped its legal authority by demanding the resignation before holding a hearing.

“The Securities Act is quite clear about which orders can be issued on a temporary basis and which require a hearing,” said Poonam Puri, co-director of the Hennick Centre for Business and Law at Osgoode Hall.

Puri said the OSC was within its rights to halt trading in Sino-Forest shares before a hearing, but that it couldn’t do the same for a resignation order.

Taking a more aggressive stance on enforcement is the OSC’s new style under chairman Howard Wetston, who took over from predecessor David Wilson last year, said Richard Powers, a business law professor at the U of T’s Rotman School of Business.

“It’s a very aggressive stance by the OSC, and I think that what we can expect under Howard Wetston,” said Powers.

Powers said overreaching once in a while comes with the new, aggressive territory.

“There’s a new sheriff in town. If they get their wrists slapped once in a while, who cares?” Powers said.

OSC spokeswoman Wendy Dey said the original order “was varied by the Commission because the Commission was persuaded that (a resignation order) can only happen after a hearing.”

That hearing must take place within 15 days, said Dey, who wouldn’t say how the OSC had been persuaded.

Muddy Waters founder Carson Block, in an interview from Brazil, praised the OSC for its actions.

“It was a little embarrassing that they had to change the resignation order, but the OSC is doing what they should be doing, and protecting the public,” said Block. “I think because of the extra-territorial nature, some people think they’re beyond the reach of regulators in the U.S. and Canada. I think this sends a message that they’re not.”

While the regulator’s actions didn’t come quickly enough for investors who saw their shares crater by 75 per cent after Muddy Waters’ report, Block said he was surprised the OSC moved as quickly as it had.

“A regulator has a higher burden of proof than a short-seller, and they were also hamstrung, because every piece of information they needed from China had to go through diplomatic channels. We didn’t have to do that,” said Block.

As a short seller, Block is no stranger to criticism, but he admitted the scale of the reaction to his company’s original Sino-Forest report caught him somewhat off guard. He said it’s been grating at times.

“Some days it’s harder than others to shrug it off, but life goes on,” said Block.

With files from Vanessa Lu

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